Agflation is here to stay: How to play the agricultural commodity bull market

Agricultural commodities look like they are beginning to see the start of a sustained bull market. First, precious metals, then base metals and now agriculture. Since the middle of 20202 soybeans and corn have increased by 55% with wheat registering a 35% gain.

Governments in Asia (China in particular) and in North Africa have been buying imported grains and pulses in an effort to build up their strategic reserves. Authorities in many countries made use of those reserves to dampen down domestic food prices during the pandemic, but now those reserves are running low.

For example, estimates of Chinese imports of corn for the 2020-21 crop year were recently tripled to 22 million tonnes. Strong demand and the pressing political need to clamp down on food price spikes will continue to be a strong driver of agricultural import demand.

Food is a highly politicised issue across almost every country, but especially in more authoritarian economies where provision of cheap food is seen as a way of ensuring citizens are on the side of the ruling party. The uprisings in North Africa and the Middle East in the early 2010’s were, at least in part sparked by higher food prices and the light in shone on broader inequalities.

A decade later and a number of economies fear struggling with the same food insecurity issues that plagued them before, especially if renewed coronavirus concerns result in ongoing production and supply chain disruption to domestic output and the cost of importing food.

Unfortunately many less developed countries will be last in the queue to receive the vaccine. They may face sharply rising demand elsewhere in the world at the same time as their ability to provide for themselves will be curtailed. As agricultural prices march higher this could set the stage for a repeat of the civil and political uprisings seen a decade ago. If so watch out for the impact this could have on the security of other commodity production carried out in the region.

Higher prices will eventually result in a response in the form of weaker demand and / or stronger supply. I believe we’re a long way from that occurring. As the charts below illustrate, the soybean market is leading the way with prices back to levels last seen in 2012 and only 25% off its record high near $18 per bushel. Both corn and wheat have been basing for several years and are only now showing signs of breaking out of those formations.

Chart 1: Soybeans lead the way

Chart 2: Corn futures breakout of multi-year rectangle base

Chart 3: Wheat futures close to breakout

How should investors play the agricultural bull market? Probably the easiest and more diversified way is to use a a fund that invests in agricultural futures contracts. Up until recently investors faced the headwind of a negative roll yield, which could sap returns, even in a bull market. That changed dramatically during 2020 and the futures curve is now much more favourable to long only investors.

The Powershares DB Agriculture Fund has a little less than 40% invested in wheat, corn and soybean contracts and so it isn’t a pure play on the issues discussed in this article. In contrast, the iPath Grains ETN focuses solely on soybeans, corn, and wheat with a split of 42%, 39%, and 20% respectively among the three commodities.

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